Navigating the Indian Rupee: Understanding its Neutral Stance and RBI’s Influence

For the past three months, the Indian rupee has maintained a neutral stance, trading tightly around 82.00 on the USD/INR scale. While India’s macroeconomic fundamentals have witnessed improvements and growth remains robust, the intervention by the Reserve Bank of India (RBI) has limited the rupee’s mobility. In this comprehensive analysis, we delve into the factors influencing the Indian rupee’s trajectory and present our view on the USDINR exchange rate.

Macro-Fundamentals and RBI Policy:

India’s 10-year yield recently hit a significant milestone, dropping below 7% for the first time in over a year. This decline can be attributed to anticipated disinflation in April, with the Consumer Price Index (CPI) projected to approach the midpoint of the bank’s target range of 2-6%. Additionally, slightly looser liquidity has played a role, with the liquidity surplus returning to around INR 1000 billion after a temporary shift into deficit. Although liquidity remains tighter than a year ago, continued disinflation is expected to validate the RBI’s decision to pause its policy rate hikes in early April. This pause was deemed a “tactical” move to evaluate the impact of the 250bps rate hikes, rather than a shift in policy direction. With disinflation accelerating and oil prices experiencing a three-week decline, dropping below $75 per barrel, this pause is expected to be prolonged.

Positive Macro-Fundamentals:

India’s economy benefits from disinflation, robust growth momentum, and reduced imbalances, creating a positive backdrop. The manufacturing Purchasing Managers’ Index (PMI) surged to 57.2, marking its second consecutive monthly increase and positioning India as the region’s strongest performer after Thailand. Furthermore, the Services PMI witnessed a remarkable jump from 57.8 to 62.0, representing the fastest gain in over a decade. Notably, new orders, including those from exports, displayed strength, with exports increasing for the third consecutive month. These developments bode well for continued growth in services exports, as evident in the trade and Balance of Payments (BoP) data. India’s credit impulse also remains strong, with March recording 6.6% of GDP, while the RBI’s economic activity index (EAI) indicates accelerating momentum throughout the first quarter.

RBI Intervention:

Despite India’s impressive growth momentum and consistent equity inflows in recent months, the rupee’s strength has been curbed by RBI intervention. Weekly data showcases a continuous rise in foreign exchange reserves, reflecting the central bank’s efforts to stabilize the currency. Although the current FX reserves of $515 billion are still below the peak of $580 billion in 2011, it is expected that the RBI’s intervention policy will persist.

USDINR Outlook:

Considering India’s improved macroeconomic fundamentals, we have maintained a neutral stance on the USDINR exchange rate since February. The influence of RBI intervention limits the rupee’s movement, outweighing the positive impact of the country’s economic fundamentals. Consequently, we anticipate that USDINR will continue to trade within the range of 81.50 – 82.50.


India’s macroeconomic fundamentals showcase significant improvements, accompanied by a resilient growth trajectory. Disinflation, reduced imbalances, and robust credit impulses form a solid foundation for the Indian economy. However, the primary factor influencing the Indian rupee’s movements remains RBI intervention. As a result, we maintain our neutral outlook on the rupee, urging market participants to carefully monitor RBI intervention policies and their implications on the currency’s performance.